U.S. stock index futures and the dollar extended losses after the steeper-than-expected drop in retail sales and weak New York factory data, while U.S. government debt prices added to gains on rate cut expectations.

WASHINGTON
(Reuters) - Sales at retail stores recorded their biggest monthly drop
in more than three years in September while a measure of inflation
eased, according to government data on Wednesday that intensified
recession fears.

A gauge of manufacturing in New York State tumbled in October to the
lowest since its inception in 2001, a report from the New York Federal
Reserve Bank said.

Retail sales fell 1.2 percent last month to a seasonally adjusted
$375.5 billion, the Commerce Department said. That was the sharpest
drop since August 2005 and far worse than the 0.7 percent decline
economists polled by Reuters had expected.

The Labor Department reported that U.S. wholesale prices dropped 0.4
percent in September, in line with expectations as another fall in
energy costs eased price pressures.

With economic growth looking shaky and inflation cooling, investors
bet on further interest rate reductions from the Federal Reserve on top
of the 3.75 percentage points in cuts the central bank has already
taken in the past 13 months.

U.S. stock index futures and the dollar extended losses after the
steeper-than-expected drop in retail sales and weak New York factory
data, while U.S. government debt prices added to gains on rate cut
expectations.

"The question on everyone's minds is how deep of a recession," said
Kathy Lien, director of currency research at GFT Forex in New York.

"Today's (retail sales) number indicates a very strong chance of
negative GDP growth for the third quarter and would certainly pave the
way for another 25 to 50 basis points of easing over the next few
months and the PPI number confirms that as inflation is coming down as
well."

The credit crisis that has raged for some 14 months has taken a heavy toll on consumer confidence and spending.

Excluding autos, retail sales were off 0.6 percent for September,
double the 0.3 percent decline that economists had forecast. The house
downturn continued to take a toll on furniture and home furnishings,
with sales falling 2.3 percent, the sharpest decline since February
2003.

In the manufacturing sector, the New York Fed's "Empire State" index
of general business conditions fell to minus 24.62 in October from
minus 7.41 in September. Economists had been looking for a reading of
minus 10.0.

(Additional reporting by Doug Palmer in Washington and Nick Olivari in New York)